Senate committee advances EITC/tobacco tax bill

A bill that would enact an earned income tax credit, increase taxes on cigarettes, and levy taxes on e-cigarettes advanced past an Arkansas Senate committee Monday (March 18).

Senate Bill 571 by Senate Majority Leader Jim Hendren, R-Sulphur Springs, passed on a voice vote, with only Sen. Trent Garner, R-El Dorado, appearing to object. Because of an amendment added during the meeting, the full Senate will not vote on the bill until Wednesday.

The bill would enact almost $100 million in cigarette and e-cigarette taxes by levying a 20% special excise tax at the retail level on cigarettes, or 80 cents a pack. E-cigarettes would be subject to the same taxes as traditional tobacco products not including cigarettes, amounting to a 67% tax. E-cigarettes currently are subject only to the state’s sales and use tax.

Those tax increases would fund the same amount in tax cuts, including an earned income tax credit of at least 5% of eligible income refunded through a check sent to lower-income Arkansans. That money would come from a trust fund where the credit could be adjusted up or down depending on revenues.

The bill also would reduce from 2% to zero the tax rate for incomes between $4,500 and $8,890 in the tax table for individuals making less than $22,000. It also would increase the standard deduction from $2,000 to $3,300.

Hendren told committee members the tax package would erase the $339.49 in state tax liability for a single mom with two children earning $9.15 per hour and working full-time. In fact, with the EITC, she would receive a $77.30 check from the government. However, Hendren pointed out that she also is paying Arkansas’ high sales taxes.

Garner disputed that figure by arguing that the woman would pay more in taxes if she smokes cigarettes.

Monday’s amendment would delay the benefits provided by the EITC until 2022, a year after the fund begins accumulating, to ensure it has a large enough reserve. It also clarified that the EITC could be reduced below 5% of eligible income if revenues decline. And it increased the amount of cigarette tax revenues going to general revenues from $55 million prior to the amendment to $83.7 million.

The change was needed because Hendren said DFA had found that based on other states’ experiences, cigarette sales could drop from 140 million packs to 120 million, resulting in not only the loss of cigarette taxes but also sales taxes currently going to general revenue.

Paul Gehring, assistant revenue commissioner, told committee members that 275,000-300,000 Arkansans are eligible for the federal EITC.

Garner began the discussion asking that the vote be delayed until Wednesday because a fiscal impact statement wasn’t available until this morning. Sen. Jason Rapert, R-Conway, a co-sponsor of the bill, also asked for more time to respond to constituents. But Hendren did not want to wait. He said the bill’s fiscal impact was mostly known when he introduced it Thursday, other than how increasing the cost of the products would impact use. He said opponents of bills often use delaying tactics.

Garner also argued that he had received many emails from constituents saying e-cigarettes have helped them stop smoking. Hendren countered that many school superintendents have shared concerns at forums about the increasing numbers of young people using vaping products.

“Kids that are 16, 17 years old aren’t getting on vaping to get off cigarettes. … What bothers me about this is this is an addictive, chemically addictive product that our kids are getting hooked on,” Hendren said.

The committee heard from several vapor shop owners who said the bill would harm their businesses. Bill McCullough said he opened his shop in Little Rock five years ago after vaping helped him stop smoking cigarettes. He said his products have low nicotine content, and he doesn’t sell to minors. Scout Stubbs, who owns five vape shops and is secretary of the Arkansas Vape Advocacy Alliance, said her shops could not compete with online shops or cigarette sellers if the bill passes.

Hendren said the vaping portion of the bill would raise an estimated $5.6 – $7.4 million in additional taxes.

The committee also advanced Hendren’s Senate Bill 561, which would transfer the responsibility to collect franchise taxes from the secretary of state to the Department of Finance and Administration. Among its other provisions was one requiring DFA to report every two years to the Legislative Council regarding the effects of exemptions, discounts, credits and extensions.

The bill had been recommended by a legislative tax reform task force chaired by Hendren that met in the months prior to the session.